We are all reading story after story about this relatively new company called Google Inc. (NASDAQ: GOOG), which now has a valuation exceeding $145 billion ($190B counting A&B shares) after closing today around $625, adding almost $10 from yesterday's all-time high. In the past year, I probably have done at least 20 stories myself, and the public fascination continues.
Google has very quickly built an empire that even the mighty Microsoft Corp.(NASDAQ: MSFT) is losing sleep over. Microsoft Chairman Steve Ballmer is tired of having to field questions about Google at what are supposed to be Microsoft meetings. However, despite all the good news, I think things are getting a tad pricey right now. But you still hear numbers literally being thrown into the media current by silly guys in need of attention (Henry Blodget) who have long been considered passé, most recently to the tune of Google achieving a $2,000 price tag. Of course, no time frame was associated with this prediction, so it is pretty much worthless gossip.
If Google was $2,000 per share, it would have a capitalization of $470 billion. For comparison, General Electric (NYSE: GE) is valued at $430 billion, and Exxon Mobil (NYSE: XOM) is valued at $516 billion, so it would be jockeying for position as the largest company in the world.
As it stands today, you could trade Google for all of Berkshire Hathaway (NYSE: BRK.A) -- valued at $135 billion -- and have money left over to buy all $9.8 billion worth of Intuitive Surgical (NASDAQ: ISRG), still leaving a few bucks for a lifetime of fine dining. This comes to mind because this is what I have actually done instead. The combination has destroyed Google in terms of stock appreciation. Nevertheless I am gaining appreciation for Google in many ways. I think the company has done, and is doing, many smart things. Many of its adventures have not borne fruit yet, but it has carved out a HUGE swath of the internet that will not be rivaled anytime soon, and it is still growing. Does this growth and these investments (expenditures) justify the price today? The answer to that question in my opinion is no, not today. I think Google will pull back again after its October 18th earnings report.
News of the gPhone might bring some future value but not today or tomorrow -- it is a long-term goal to grab a piece of the mobile phone world. I think that Google is smart to stay away from hardware adventures and stick to what it does best, providing web users with access to information, and advertisers with access to web users.
YouTube has added value to Google as people speculate about the potential, but so far that is all it is. Yesterday, Doug McIntyre explained some of Google's current YouTube profit strategy, but for now it has spent billions and it is not returning anything directly to the bottom line.
If you believe Google is worth what someone is willing to pay, then each day you have your answer in the marketplace. However, if you believe that most stocks are overvalued or undervalued in the short term, then what value would you place on this stock in terms of investing new money? The trailing P/E ratio today is 53 based on earnings of just under $12 dollars per share. It earned $3.56 in the last quarter and is projected to earn just under $20 per share in the coming year. If that was accurate, than the forward P/E would be 31.25. For starters this does not seem totally unreasonable. In August I made the case that Google might be undervalued, and it probably was, along with many other stocks.
Now, I think investors and analysts have become more realistic than they have been in the past. The problem I have is that the stock is so hyped that investors keep buying into it a year in advance. Maybe my value bias continues to prejudice me against the stock, but I think that it is now at next year's price, or close to it. I think that unless Google beats its top- and bottom-line earnings without significant slowing in its growth, it is a $500 stock today, just as it dropped to this level after its last earnings report.
One measure of this has to be the ROE, ROA and ROIC in the low twenties, which continue to be obtainable from much less-risky companies and have been pointed to as a big question mark by various business journals from time to time. In addition, the price-to-sales, and price-to-cash-flow are sky high and have been historically more important metrics than the P/E. Long-term investors who got in early should do quite well in any event, but people getting in now should think twice.
To find potential opportunities and verify my track record, read Chasing Value or Serious Money.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm.
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